[일 배우기] Introduction to Option Valuation

Introduction to Option Valuation

 

1. Moneyness ; does the option give positive payoffs?

a. with spot price

In the money	for call holders, when the underlying price is higher than the strike price.
At the money	for call holders, when the underlying price is lower then the strike price
Our of the money	the underlying price is equal to the strike price

b. with forward price

in-the-money-forward	for call holders, the strike price is lower than the forward price	price will go up > hold call options
at-the-money-forward	for call holders, the strike price is equal to the forward price
out-of-the-money-forward	for call holders, the strike price is higher to the forward price	price will go down> short the underlying asset

 

2. Expiry; Moneyness is at the expiry. then before expiry, is option worthy?

Option Value = Time Value + Intrinsic Value

before expiry, option is worth from the potential future payoffs.
Intrinsic value is the payoff line.
Time value is always positive but decreases over time (shorterm worths more than longterm)

*From Wikipedia

 

3. Factors affecting the option value

a. Interest rates: when the interest rates is high, future price tends to be higher too. > Greater value to call holder, lower value to put holder.

b. the strike price & the asset price : when the option is deep out of the money/deep in the money, time value goes to 0.

c. Maternity : longer maturity = possible more volatility. so longer term= higher value

d. Volatility of the underlying asset : more volatile asset, higher value

 

4. Put-Call parity = Call + PV(x) = Put + SpotPrice

Synthetic Purchase : buying a call and selling a put of an underlying forward asset = spot asset price - present value

implying no-arbitrage value.